Fiscal Policy Is Still an Effective Instrument of Macroeconomic Policy

Abstract

Recent developments in macroeconomics and macroeconomic policy, what has come to be known as “New Consensus in Macroeconomics”, downgrades the role of fiscal policy and upgrades that of monetary policy. This contribution aims to consider this particular contention by focusing on fiscal policy. We consider fiscal policy within the current “new consensus” theoretical framework, which views fiscal policy as ineffective, and argue that it deserves a great deal more attention paid to it than it has been recently. We review and appraise recent and not so recent theoretical and empirical developments on the fiscal policy front. The possibility of fiscal and monetary policy coordination is proposed and discussed to conclude that it deserves a great deal more attention and careful consideration than it has been given to in the past. Our overall conclusion is that discretionary application of fiscal and monetary policy in a coordinated and focused manner as a tool of macroeconomic policy deserves serious attention paid to it than hitherto.

Key words: Fiscal policy, New consensus macroeconomics, Coordination of monetary and fiscal policy.
JEL: E62, H30.